A business loan can be a simple medium for fulfilling different business needs such as getting working capital, increasing inventory, building a warehouse, and renovating. Nonetheless, the diverse loan options when considering business loans could be costly and complex, making it tough to opt for the right loan as per a particular business need.
Finding ways to get funds could be challenging for small and medium-sized enterprises with limited operations and assets. To maximize the probability of obtaining a business loan, here are the things to know before considering it.
Types of Loan
Getting a loan could be difficult if you wish to start a business or if it is just the first year of it. This is when you would try getting loans via friends, angel investors, crowdfunding, or personal loan lenders.
Many business owners prefer loans especially available for small businesses, such as SBA loans, including PPP loans. While the PPP loans are now no longer available, business owners look for the best PPP loan (SBA) alternative offering fantastic rates and conducive terms and conditions for the long term.
Based on the term, there are short-term and long-term loans, the former enabling you to use the money received right away and repay it within a certain period, usually up to 18 months. A long-term loan is recommended for expanding your enterprise though.
Prerequisites and Strict Criteria
To qualify for getting a business loan, it is essential to meet the predefined strict criteria and have the prerequisites. While the exact criteria and requirements will likely differ from one lender to another, banks have truly strict standards. Following are the prerequisites:
- Collateral as valuable assets to back the loan given, which facilitates lower interest rates
- Credit history that should a strong one to score well in a personal credit check test, especially in the case of a small business
- Income and cash flow that should be strong enough to obtain a loan from a lender
- Business experience that should be at least two successful years
- Current debt amount should be low to get fresh business loans.
Lenders consider the business type and the related risks of running it prior to giving a business loan. Usually, it is easier to get loans for some industries than others.
There are some common eligibility criteria to ensure a seamless loan application process. These are a minimum of 18 to 25 years of age of the borrower (differing from one lender to another), a maximum of 65 years of age when the loan matures, profitable business for at least two years, and at least five years of business experience of the borrower.
It is worth keeping in mind that the loan application & approval process can take time. This means you need to prepare for it. Even though a specific option may be the best for your business in terms and conditions, it may not be in terms of time.
That said, you need to know what you are getting into, especially if you are applying for a loan from a bank. In terms of processing time, a bank may take around two to three months. This is likely to be far more than what you can accept as a waiting period.
This is something that you need to know even before knowing how long the whole process could take. It is essential to keep the required documents ready before applying for the loan to make it easier for the lender to streamline the overall process.
Although varying from one lender to another, some documents are commonly given for verification. These are ID proof, address proof, proof of business, business and personal bank statements (last six months), tax return records, financial statements, and legal documents such as franchise and commercial lease agreements.
The Best Time to Apply
Many business owners, especially beginners, have this question in mind. However, the fact is that there is truly no best time for a loan application. Because the time of application does not significantly affect the probability of the application being approved.
Thus, it is wise to apply for a loan once you recognize a business requirement that needs finance.
This factor is critical in increasing the probability of your loan application approval. If there is sufficient insurance, the chances of obtaining the loan increase. Your eligibility is directly proportional to the risks linked to you and your business.
Obviously, the lower the risks, the higher the chance of getting a loan! Having personal or business insurance is essential. This is so that the borrowed amount can be repaid in case of your early demise.
It is wise to apply for a loan after knowing what is required for sustaining eligibility and increasing the probability of approval.